Karen Braun is a Reuters market analyst. Views expressed are her own.

CHICAGO, Aug 19 (Reuters) – Although last Friday’s soybean supply and demand report from the U.S. Department of Agriculture delivered a bearish feel to the market, there were quite a few bullish components lurking within.

USDA projected record U.S. soybean yields for this year’s harvest, offsetting a massive demand-based decrease in domestic old-crop carryout of 95 million bushels.

As a result, new-crop carryout for the world’s No. 2 soybean supplier rose by 40 million bushels despite demand increases for the 2016/17 marketing year. Traders still interpreted the overall news as bearish, since soybean futures contracts fell to end the week.

Traders said they expect the production forecast to cap rallies in the soybean market. (Full Story) This may be true in the short term, but it would not take much for the supply situation to tighten back up.

Based on recent trends, strong demand, and favorable weather for the current soybean crop, both supply and demand are likely to increase for U.S. soybeans in the upcoming marketing year.

But whichever one wins out will determine the direction of the soybean market, which is very sensitive to shifts in both supply and demand. So the latest figures from USDA are no cause for complacency.

DEMAND IS NOT GOING AWAY

Global soybean demand is stronger than ever and is still on the rise. Over the past couple of years, USDA has had the habit of increasing both exports and crush throughout the marketing year in response to the increasing demand (http://reut.rs/2bBIIVw).

Soybean exports and crush projections for the 2016/17 marketing year, which does not begin until Sept. 1, have increased by 3 percent and 1 percent, respectively, since the initial estimates were released in May.

Ending stocks have had the opposite trend. Although forecasts for the 2014/15 and 2015/16 carryout had at times topped 450 million bushels, both years ultimately fell far short of that at 191 million and 255 million bushels, respectively. Note that the latter figure is still subject to adjustment (http://reut.rs/2bBID4a).

Soybean use is already far outpacing long-term expectations, making the ceiling difficult to identify. Exports and crush are well ahead of USDA’s latest annual 10-year forecast, which is released each February.

U.S. soybean exports are annihilating these long-term projections. The latest estimate for the new marketing year, 1.95 billion bushels, is not even reached within USDA’s 10-year forecast period. The last season in the series, 2025/26, has 1.925 billion bushels slated in.

For the same marketing year, crush in 2015/16 is currently forecast 10 million bushels ahead of the February projection and 2016/17 crush is 30 million bushels ahead. The 1.94 billion bushels of soybeans expected to be crushed in the 2016/17 season were USDA’s target for the 2018/19 season.

With no evidence that the world’s appetite for soybeans and soybean meal is going away, U.S. exports and crush seem unlikely to fall below the current expectations and in fact are very good candidates for a continued increase.

In addition to the longer-term demand trends, short-term demand is holding its own. So far in August, daily soybean sales announcements to China and unknown destinations have been made on 11 separate days. For reference, there were only six such days in all of August 2015.

YIELD HAS CONTROL

Soybean yields are in the driver’s seat as they completely washed out the massive month-on-month drop in old-crop carryout. The market had expected an increase in both yields and carryout for 2016/17, but not to such a large degree in either one.

USDA’s soybean yield of 48.9 bushels per acre tops last year’s record (48 bushels per acre), the average pre-report analyst estimate (47.5 bushels per acre), and USDA’s initial 2016/17 trend yield (46.7 bushels per acre).

Such a high yield is not at all hard to believe. Not only are crop conditions the best since 2004, but the weather has been very supportive and will likely continue this way, at least in the near-term.

A couple of good, soaking rains are key for higher soybean yields, especially during August, the most critical month for pod setting and filling. Over the past week, ample rain showers blanketed the Midwest, including parched areas in the Eastern belt, and the forecast for next week holds moderate temperatures with scattered rainfall.

A higher realized yield at the end of the harvest is also likely based on USDA’s recent trend of underestimating final soybean yields in August. This has been the case for the past five years, showing that USDA certainly has not had a bias of being too high early on (http://reut.rs/2batdTJ).

However, the soybean balance sheet is highly sensitive to even the slightest tweaks in yield. If this year’s yield were to evenly match last year’s record of 48 bushels per acre, carryout would be slashed by 25 percent. And this makes the highly dubious assumption of no further increases to demand (http://reut.rs/2bpLelk).

Another factor on the supply side that is subject to change is planted/harvested area. In the past two seasons, final soybean area came in lower than what had been expected during late summer. This year’s soybean-friendly economics may quash that trend, but it is something that cannot be ruled out.

CLARITY COMES IN OCTOBER

Even though the 2016/17 U.S. soybean crop should be completely harvested in about three months, the associated balance sheet will not be “finalized” until October 2017. But the 2015/16 situation will become clearer in October, and this will set the tone for the new marketing year.

With the soybean marketing year ending on Aug. 31, the necessary pieces of information do not all become available until about a month afterward and are therefore not reflected until the October supply and demand report.

In early October, final trade data from the U.S. Census Bureau as well as crush data from USDA’s Fats and Oils report will be available to adjust both old-crop exports and crushing accordingly. USDA’s Sept. 30 quarterly grain stocks report will inform on the latest supply situation.

With this updated information, the market will be able to settle on 2015/16’s carryout, which has been relatively volatile to the downside over the past few months. This will set the starting point for the 2016/17 soybean balance sheet.

But with more than a year to go until the final picture of 2016/17 U.S. soybeans emerges, what we are talking about today may be something entirely different from what we are talking about a year from now.